JRobot

instead of using attiny12..u could have reduced the clock by writing to register '0x11' of ov6620, and very well used an external quartz crystal. Hence you would have used a crystal instead of attiny12 and also you wouldn't have had to overclock atmega8.
another question is,you have made OV6620 to output its clock signals to one of the io pins..n i guess tht i/o pin is 'pin12:FODD'. How did you do tht??
also why is mosi of attiny12 connected to transistor?is it for resetting atmega8?

Yes, you can reduce the clock rate of the OV6620 by writing to register 0x11, and the AVRcam even does this at certain times (for example, when dumping a frame, the frame rate is reduced to by 1/2). Using an external crystal doesn't really solve any of the issues that are solved by using the same synchronous clock source for both the mega8 and the OV6620. This synchronization is really what allows so much do be done with so few MIPS. The tiny12 is needed because the OV6620 needs to be told to emit its 17.7 MHz clock externally (so the mega8 can use it).

Now, it WOULD be possible to use an external 16 MHz crystal to drive both the mega8 and the OV6620, and thus skip the tiny12, but this would require that the on-board 17.7 MHz crystal on each camera module would need to be removed manually by me. It also means that the PAL video output from the OV6620 would no longer work (since it assumes a 17.7 MHz clock source).

Yes, the tiny12 holds the mega8 in reset until it can guarantee that a clock source is available for it (in this case, from the OV660).